Abstract
In this paper we consider a differentiated oligopoly with two product varieties that are supplied by two groups of firms. After computing the Cournot solution of the game, we study its sensitivity to different sources of competition, namely the degree of product substitutability and market composition. Market composition can change either via new firms entering one industry or via firms switching production techniques, thus modifying the intensity of intra-brand competition. After studying the welfare consequences of an intensification of competition, we identify the equilibrium market composition when firms are driven by profit considerations. All the results are expressed in terms of the degree of product substitutability and of what we define “weighted relative efficiency” (WRE), which is a parameter combining both firm characteristics and market conditions.
Highlights
In response to consumers’ increasing concern for the environment and interest in making greener choices,1 firms have started investing in production practices that allow them to receive a label certifying their compliance with certain set standards
After computing the Cournot solution of the game, we study its sensitivity to different sources of competition, namely the degree of product substitutability and market composition
We propose a differentiated oligopoly model with two product varieties made by two groups of firms
Summary
In response to consumers’ increasing concern for the environment and interest in making greener choices, firms have started investing in production practices that allow them to receive a label certifying their compliance with certain set standards (e.g. organic, bio, sustainable, fair trade). In our model we adopt an asymmetric context that encompasses both the Dou and Ye (2017) and Saggi and Vettas (2002) models: firms sustain different production costs, and markets exhibit different features, so that all the model parameters are asymmetric This allows us to express our results in terms of market composition, and of market conditions and firms’ characteristics. A third main result concerns the impact of intra-brand competition on the equilibrium supply of individual firms when the size of the industry is fixed, that is, when firms switch from one group to the other.
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